Trustees Beware: Provide Timely Information to Beneficiaries
by Carol Warnick
Individual trustees often fail to fulfill the duties imposed on trustees, not only by the trust instrument, by also by the trust statutes applicable in the jurisdiction. It is often the case that the individual trustee is a member of the family and seems to believe that the rest of the family won’t care if he or she doesn’t follow the applicable statutory and trust requirements.
A recent Nebraska case, In Re Estate of Forgey, 906 N.W. 2d 618, (Neb. 2018), featured a decedent who died in 1993. By 2013, when one of the family members initiated litigation, the trustee, a son of the decedent, had neither distributed out the property of the trust into the separate shares called for by the trust document, nor had provided annual accountings to the beneficiaries as required by both the Nebraska statutes and the trust document itself. In addition, he failed to sign and file the timely prepared federal estate tax return, resulting in an IRS assessment of penalties and interest of over $2 million.
The trustee had no explanation for his failure to sign and file the federal estate tax return, but since his CPA was able to negotiate with the IRS somewhat successfully, there was some mitigation. The trustee also argued that he couldn’t distribute the property right away and still pay the estate taxes, as he needed income from various trust assets to pay the taxes in order to avoid liquidating trust property. The court was somewhat persuaded by the reasons put forth by the trustee in these examples.
There were also a myriad of other allegations made by the beneficiaries against the trustee in the 4-day trial which the trial court held were unfounded. The trial court did find the trustee had committed certain breaches of trust and imposed some penalties, but the trial court failed to award attorneys’ fees to the beneficiaries for bringing the action since many of the beneficiaries’ accusations were deemed to be unfounded. The beneficiaries appealed.
The Nebraska Supreme Court generally agreed with the trial court’s decision, but in addition to making a few revisions to the trial court’s order, reacted very differently with regard to an award of attorneys’ fees. According to the Nebraska Supreme Court, “without an award of attorney fees, there is no penalty for not reporting to the beneficiaries for many years until the litigation occurred.” The court further concluded that since the beneficiaries had little choice but to file litigation to obtain information, “if we do not impose a penalty such as attorney fees in the instant case, then future trustees may believe that the statutory requirement to report has no significance.”
Thus, even when many of the specific beneficiary’s claims were determined by the court to be unfounded or mitigated, the Nebraska Supreme Court ordered attorneys fees for the beneficiaries who were forced to file suit to obtain information from the trustee. The Court’s stated purpose in making this award was to send a message to trustees in general that they need to follow the requirements of the applicable statutes, as well as the trust document itself, and provide timely information to beneficiaries.